House Dems: Many businesses that face Obama tax hike are too big to be labeled 'small'

Sept. 14 (Bloomberg) -- U.S. Commerce Secretary Gary Locke talks about President Barack Obama's proposed tax breaks for small businesses and U.S. trade policy. Locke speaks with Margaret Brennan on Bloomberg Television's "InBusiness." (This is an excerpt of the full interview. Source: Bloomberg)

Republicans oppose President Obama's plan to raise taxes on the nation's wealthiest households because, they say, many small businesses - a major engine of job growth - would be slapped with a tax hike.

"The top 2 or 3 percent" of all small businesses would see their taxes go up under the Obama plan, Sen. Orrin Hatch (R-Utah) fumed this week. "That's 750,000 to 800,000 small businesses! That create most of the jobs in our society!"

The thing is, some of those businesses are not particularly small. In fact, they're quite large.

Among the firms Republicans want to protect from new taxes, according to research by House Democrats: The management team at Wall Street buyout firm Kohlberg, Kravis and Roberts (KKR), which recently reported more than $54 billion in assets managed by 14 offices around the world. Auditing firm PricewaterhouseCoopers, a household name with operations in more than 150 countries. And the Tribune Corp., which owns the Chicago Tribune, the Los Angeles Times and the Baltimore Sun.

KKR, PricewaterhouseCoopers and the Tribune, it turns out, are organized as "pass-through" entities - companies that typically avoid corporate taxes by reporting profits on the individual tax returns of their owners, managers or shareholders.

The vast majority of "pass-through" entities are, in fact, small businesses, often with one or two employees and very small profits. Next year, the nonpartisan Joint Committee on Taxation predicts that taxpayers will report about $1 trillion in income from pass-through entities. Only about 3 percent of them - about 750,000 taxpayers - will earn more than $250,000, the threshold at which Obama would raise tax rates. Those returns will account for about half of all pass-through business income, the JCT reported, meaning the tax hikes would strike a large segment of such activity.

But not "all of the income is from entities that might be considered 'small,' " the JCT said in a report issued in July. "For example, in 2005, 12,862 S corporations and 6,658 partnerships had receipts of more than $50 million."

A separate analysis by the nonpartisan Tax Policy Center found that only about 10 percent of business income above the threshold was reported by sole proprietorships, with the rest coming from partnerships and S corporations, which can be extremely large.

Alan Viard, an economist in the Bush White House who is now at the American Enterprise Institute, agreed that many firms represented in the top tax brackets are hardly small. Economically, that doesn't matter, he said: Obama would still be raising taxes on a significant source of jobs and economic activity.

Politically, however, it's a very different matter to raise taxes on a Wall Street hedge fund than it is to tax your neighborhood dry cleaner. Which is why Republicans continually define pass-through entities of all sizes as small businesses, a position Viard called a "fallacy."

"How can it be that 3 percent of owners are accounting for 50 percent of small business income? Those firms they're owning can't be all that small," Viard said. "And that's true. They're very large."

Added Rep. Chris Van Hollen (D-Md.), a member of House leadership who heads the committee charged with electing House Democrats: "Republicans are trying to disguise this issue as a small business issue when the facts tell a different story. Among the major beneficiaries are hedge funds, billion-dollar private equity funds, major Washington lobbying firms and other million-dollar special interests."